Blog Post

Weathering the Storm in Central Europe

Poland is the winner among 24 EU countries in a ranking based on the stability and growth of five indicators (production, productivity, employment, labour market performance and exports) between 2008 and 2011. E.g. Polish business sector output and employment hardly declined during the crisis and by the end of 2011 they were 14% and 3% higher respectively than in early 2008 (All indicators consider the business sector without construction, real estate activities and agriculture, in order to exclude public sector developments and construction, which was doing like crazy in some countries).

By: Date: July 20, 2012 Topic: Macroeconomic policy

Poland is the winner among 24 EU countries in a ranking based on the stability and growth of five indicators (production, productivity, employment, labour market performance and exports) between 2008 and 2011. E.g. Polish business sector output and employment hardly declined during the crisis and by the end of 2011 they were 14% and 3% higher respectively than in early 2008 (All indicators consider the business sector without construction, real estate activities and agriculture, in order to exclude public sector developments and construction, which was doing like crazy in some countries).

On the other hand, among the Central European countries Latvia and Estonia rank poorly at the 21st and 22nd position. Their business sector output declined by about 20-25% and despite rapid economic growth since late 2009, output and employment are still about 10% below the 2008 level.

Other Central European EU members rank in between, with the Czech Republic, Slovakia and Lithuania at the still respectable 6th, 9th and 11th places, respectively. They are followed by Romania (16th), Bulgaria (17th), Hungary (18th) and Slovenia (20th).

What could explain these diverse reactions to the global financial and economic crisis? One obvious answer is the differences in pre-crisis build-up of vulnerabilities. External imbalances in the Baltic countries, Bulgaria and Romania were larger, the reliance on external credit (instead of foreign direct investment) was higher, domestic credit growth and housing price increase was faster than e.g. in Poland, the Czech Republic or Slovakia. It is therefore not surprising that more vulnerable countries were hit harder. But economic policy may also have played a role.

Poland adopted a significant fiscal stimulus in 2009 and 2010, which has likely helped the economy. The role of exports in the Polish economy was sizeable in 2008 (about 45% of GDP), but not as high as in e.g. Hungary (80%) and therefore the fall in external demand could have had a smaller negative impact in Poland. Exporters were also helped by the very significant depreciation of the Polish zloty, though it hurt foreign currency borrowers, as about 30% of loans were granted in foreign currencies.

Poland also significantly outperformed Sweden (ranked at 8th place), even though Sweden also implemented a fiscal stimulus (even larger than Poland), experienced the depreciation of the Swedish krona (though less than in Poland), and the export share to GDP is almost the same as in Poland. Furthermore, labour markets are equally protected in Poland and in Sweden according to the OECD and hence labour market flexibility cannot explain the differences. The Polish economy did something really extraordinary in response to the crisis.

The depressing economic contractions in Estonia and Latvia could, in addition to pre-crisis vulnerabilities, be related to the difficulties in the so called “internal adjustment” of the real exchange rate, i.e. productivity improvements and wage cuts to restore price competitiveness, when depreciation of the nominal exchange rate is not available. Private sector wages have declined to some extent, but the wage falls have corrected just a small fraction of pre-crisis wage rises, they were accompanied by massive employment losses, and they were temporary and were largely or even fully reversed by the end of 2011 (see detailed charts for all 24 EU countries here).

In a December 2011 paper comparing Iceland, Ireland and Latvia I found that the policy mix of Iceland, which included devaluation, capital controls, bank defaults and reorganization, and fiscal consolidation led to the smallest fall in employment, despite the greatest shock to the financial system. Latvian authorities decided to keep the exchange rate peg, which has likely contributed to Latvia’s dramatic hit, which was harder than in any other country of the world. And Ireland, a euro-area member, also suffered heavily. Yet the recovery in Latvia also seems to be V-shaped, which is good news – but one has to add that after losing one quarter of GDP a fast recovery is not unexpected and the main challenge is medium term growth, as I already already argued both in 2009. Output and employment (even when considering the business sector excluding construction, real estate activities and agriculture) are still more than 10 percent below the pre-crisis peaks.

Zsolt Darvas is the author of Compositional effects on productivity, labour cost and export adjustments.

This post was originally published in GE for CEE.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

May
25
14:30

How can we support and restructure firms hit by the COVID-19 crisis?

What are the vulnerabilities and risks in the enterprise sector and how prepared are countries to handle a large-scale restructuring of businesses?

Speakers: Ceyla Pazarbasioglu and Guntram B. Wolff Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic
 

Upcoming Event

May - Jun
31-1
10:30

MICROPROD Final Event

Final conference of the MICROPROD project

Speakers: Carlo Altomonte, Eric Bartelsman, Marta Bisztray, Italo Colantone, Maria Demertzis, Wolfhard Kaus, Javier Miranda, Steffen Müller, Verena Plümpe, Niclas Poitiers, Andrea Roventini, Gianluca Santoni, Valerie Smeets, Nicola Viegi and Markus Zimmermann Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event
 

Past Event

Past Event

[Cancelled] Shifting taxes in order to achieve green goals

[This event is cancelled until further notice] How could shifting the tax burden from labour to pollution and resources help the EU reach its climate goals?

Speakers: Niclas Poitiers and Femke Groothuis Topic: Green economy, Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2022
Read about event More on this topic
 

Past Event

Past Event

How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article Download PDF
 

Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
Read article Download PDF More on this topic
 

Working Paper

The low productivity of European firms: how can policies enhance the allocation of resources?

A summary of the most important policy lessons from research undertaken in the MICROPROD project work package 4, related to the allocation of the factors of production, with a special focus on the weak dynamism of European small and medium-sized enterprises (SMEs).

By: Grégory Claeys, Marie Le Mouel and Giovanni Sgaravatti Topic: Macroeconomic policy Date: April 25, 2022
Read article More on this topic
 

External Publication

What drives implementation of the European Union’s policy recommendations to its member countries?

Article published in the Journal of Economic Policy Reform.

By: Konstantinos Efstathiou and Guntram B. Wolff Topic: Macroeconomic policy Date: April 13, 2022
Read article Download PDF More on this topic More by this author
 

Working Paper

Measuring the intangible economy to address policy challenges

The purpose of the first work package of the MICROPROD project was to improve the firm-level data infrastructure, expand the measurement of intangible assets and enable cross-country analyses of these productivity trends.

By: Marie Le Mouel Topic: Macroeconomic policy Date: April 11, 2022
Read about event More on this topic
 

Past Event

Past Event

Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 2022
Read article
 

Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
Read article More on this topic More by this author
 

Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
Load more posts